The Commerce Times

Financial crisis shakes EU

Vienna – If looks can be deceiving, then John Hegarty isn’t fooled. As the Head of Financial Reporting for the World Bank, he knows that the bustling streets of Vienna mask a grim reality.

“When you wander around the city, it doesn’t look like there is a recession,” he says. “But it’s here.”

As with most European cities, such as Amsterdam and London, there are few signs that the recession has hit consumer confidence.

The vibrant social scene is a stark contrast from the deserted restaurants in the United States. Despite bleak headlines, Europeans are seen crowding the narrow city streets, while anxious shoppers shove their way into department stores.

The impact of the global financial crisis appears somewhat muted – at least from the surface. In reality, the recession has already shaken Europe at its core. Today, the economies of the European Union are headed for a free fall, with the Baltic and Eastern European countries expected to suffer the most. For Hegarty, the biggest challenge facing his team is to help restore confidence to a broken and battered financial system.

The East-West Divide

On the 19th floor of the Galaxy Tower, Hegarty sits calmly at the front of the boardroom table. In the distance, a thin white line can be seen dividing the Alps from the grayish sky. Not once does Hegarty glance at his notes; he recites the data by memory.

“The patient isn’t dead yet,” he says. “It should reach some form of death in the next 18 to 20 months. Only then can we hope that the phoenix will rise from its ashes.”

A bitter East-West divide cuts through the heart of Europe. While Western Europe deals with falling demand, Eastern European countries – many of which have yet to adopt the euro – face the prospect of economic collapse.

In Turkey, for instance, the number of poor has exceeded the 10 million mark. Over the last decade, thousands of Turkish immigrants have settled in Western Europe. But the recession could force many back to their home country.

“The financial crisis does horrible things to hope,” Hegarty says. “Parents tend to take children out of school. This is more common among girls.”

The most vulnerable countries are former Soviet states. In the Baltic countries – Latvia, Lithuania and Estonia – GDP is expected to plummet by 10 per cent, while industrial output in Hungary and Poland will take an even larger hit.

“People who once felt safe under central planning were just beginning to adapt to the new market economy,” he says. “Now they’re falling into the abyss again.”

In Russia, former billionaires face vanishing fortunes amid falling commodity prices and massive debt loads. Hegarty says male life expectancy will dip by three to four years.

“The contraction is higher in Europe than in the United States,” Hegarty says. “There are two reasons for this. First, the Europeans simply didn’t see this coming. Secondly, there are serious imbalances in many countries. There was this belief that it could only get better.”

But that hope is beginning to waver. Even in Ireland, GDP is expected to drop by 7 per cent this year as its construction industry grinds to a halt.

Leaders of the EU called on the International Monetary Fund late last-month to double its bailout of the Eastern European countries. Hegarty says he is disappointed by the European Union’s slow response.

“There is no European-wide solution,” he says. “The EU budget was never designed for a crisis like this.”

Where are the skeptics?

As the global credit crisis deepens, Hegarty looks back to when the global economy had peaked in 2007. At a time when stocks soared, very few had voiced concern over whether the money made on Wall Street was real.

When the dream ended, the world was faced with a brooding nightmare: a collapse of confidence in a system based on trust.

“No one said, ‘This can’t be true,’” he says. “The media didn’t do it either. If you aren’t skeptical, the risks of it happening again are so much greater.”

But as the crisis shows, even skeptics have had their voices drowned out by a deluded public. Investors who asked Bernard Madoff one too many questions, for instance, were shunned from his circle of elites.

“There is a Greater Fool Theory,” Hegarty adds. “You know that it’s all unreal, but you stay in as long as you can, just so you can get ahead of everyone else.”

Going Beyond the Washington Consensus

In recent years, the International Monetary Fund and the World Bank have been accused of supporting the Washington Consensus. The policies put in place by the IMF and World Bank were often criticized for favouring the interests of the United States – at the expense of Third World countries.

But as the financial crisis unfolds, both the IMF and World Bank have silenced critics by re-emerging as the main source for regulatory advice. When Iceland’s economy collapsed, the IMF stepped in as the only option for emergency funding.

This year, the World Bank expects to lend €50 to 60 billion ($80 to 95 million), double the amount it lent during the Asian financial crisis of the nineties.

“It won’t get the world out of the crisis,” Hegarty says. “But it will set a good example. If development were a precise science, there would be no poor country in the world. Developmental assistance can only provide a fraction of what countries need.”

One of Hegarty’s main projects will be to encourage private individuals to invest in other countries and to promote improved financial reporting.

Hegarty shrugs off criticism that the financial crisis was the product of failed capitalism.

“This is capitalism working,” he says. “It is characterized by recurrent financial crises. But the tremendous question is: if this isn’t a great system, then what is? No one wants the communist system.

“We need to focus on job creation – jobs that pay well. Economic growth requires an equal division of the spoils.”

Hegarty knows that the task isn’t a simple one. And there are no guarantees that the stimulus packages will ease the pain.

The economic crisis in Europe has merely magnified the East-West division. And as plunging demand threatens to drag down the whole of Europe’s economy, the global recession will serve to test the strength of the European Union.